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CUNDILL INVESTMENT CONFERENCE
PETER CUNDILL, SETH KLARMAN ET AL.
(continued from preceding page)
Therefore, if this were Michael Milken-time in Japan, there wouldn't be even one of these suckers left by now - because you could borrow the money to take 'em over or take 'em private at between 2% and 3% for 10 years.
The biggest risk - that some cowboy does it badly (again).
Cundill: I'm not suggesting you do it the bad way. Boone Pickens went in and raised hell. And he did it with bad people. And that probably set back most reforms for 10 years. If somebody rides in with a lasso and does it badly and doesn't pay any attention to the Japanese sensibilities - because face is very important - that's, I think, one of the biggest risks. And it could result in our having turned out to have engaged in "premature accumulation."
They won't let you? They're encouraging it! They have to.
Cundill: Is it going to happen? I don't know. But frankly, I think so because of another element: Consider changes occurring in the investment business in Japan today. Nomura's new president has a doctorate in economics from the University of Chicago. And Nikko's new president went to Columbia....
Also, relationships are forming between SG Warburg and the Long Term Credit Bank. And a whole lot of other strategic alliances are taking place that I suspect will also begin to move the cultural process along as we go forward....
But many would say, "Japan won't allow takeovers to happen anyway." But in fact, it looks to me as if the Japanese, [far from not letting you,] are encouraging it - because they have to implement reforms for reasons I mentioned earlier.
Many Japanese companies are wildly overcapitalized.
Cundill: Tokyo Style, for example, shouldn't have ¥123 billion of cash. Clearly, it should distribute all of that cash to the shareholders one way or another....
One of the possibilities that scares me a bit is that some of them pay out some really big special dividends. That wouldn't be very tax effective from our point of view given the withholding tax and our limited capacity to offset that tax in some instances.... Repurchasing shares, on the other hand, would be fine. And they are allowed to do that.
Low, low rates make these ideas even more compelling.
Cundill:But one of the most important factors here is the rates at which these companies can borrow money. One of my investment friends in Japan tells me his borrowing rate if he wants to do things in Japan is only 3/8 of 1% on a short-term basis....
Or, if you'd like to borrow money for 10 years, the JGB rate - the long-term government rate - is 1.5%. And the current long-term corporate bond rate for 10 years is about 2%. Obviously, those are very compelling rates....
So as an investor, if you could get very comfortable with the valuations and you're in yen and your results are going to be measured in yen, why not borrow a little money given that the cost of carry is positive - although if you've done that recently, you've lost 20-25% of your money. Anytime you borrow money, there's always risk, of course.
Page 11 of 12
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